Thursday, December 4, 2014

The Oil Price Collapse Explained in One Cover of 'The Economist'

Note: The sheikhs will eventually win this, their cost to produce a barrel of oil is much lower than shale oil producers.


Saudi Arabia has just announced major discounts at which it sell crude to Asia and the U.S. in January.

Bottom line: They are out to bury the high cost shale prodcuers.


  1. Then the US should pull it's protection of the towel heads. Oil producers should shoulder their true cost of protection and not be subsidized by US taxpayers.

  2. its going to be nasty, however even in Saudi Arabia even with just a under a trillion in reserve, they require oil to be at 90 bucks a barrel in their Budget.

  3. [aka Stargazer] I think the real target for both nations is Russia. Saudi Arabia, for Russia's support of Iran. The US, for Russia's role in the Ukraine. Obama is not going to put any pressure on the Saudi's to limit production or increase prices. I am convinced he would love to see US shale oil production implode to placate his radical environmental constituency. He gets a two-fer: US shale oil production implodes and he can blame the Arabs.

  4. I've always countered the "Energy Independence" guys with this argument:
    "Let's burn THEIR oil while oil is cheap and they have plenty of it. When THEY run out and the price goes up, THEN we burn our own."
    Of course, we're building nukes all the while, right?

  5. Also relevant to a low oil price is commodity demand destruction. Asia is not growing. Europe is not growing. Therefore as resource exporters, S. America is not growing."Growth" in the USA is essentially government spending and the Fed induced boom which favor a few favored regions. Therefore as resource exporters, S. America is not growing. World growth is flat to down. The Saudis need money for welfare payments to its population. To think that the Saudis can sit there comfortably watching oil go down contently seems far fetched.

  6. Shale had sat on the sidelines for decades in part because the Saudis could do exactly what they are now doing, put the operations out of business with their low extraction cost oil. But after years of cries of 'peak oil' and then higher prices people I suppose thought this wouldn't happen any longer.

    And of course the other problem is that big oil gets the US tax payer to cover for the various instability issues in the middle east that would otherwise drive up their costs.

  7. Isn't the thought that predatory pricing doesn't work a basic Austrian tenett? I realize there is a difference between countries and a single company engaging in the practice, but many of the arguments still hold water. I was just reading some in Tom Woods' latest book.

    1. If the Saudis still make profits at $60 but the shale producers make losses, it's just competition, not predatory pricing. Only if the Saudis make losses will the attempt backfire.

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  8. Three cheers for cheap oil!

    After all, it is the CONSUMER who benefits. EPJ should review its Austrian econ roots and welcome it. After all, as Rothbard and Mises have explained, the efficient producers should get most of the biz and the marginal one will have to do something else or wait there turn as niche players. Just because shale produces jobs should not preclude using these resources and labor for much better served and needed consumer wants.

    Also, the Saudi's, and a couple others, are the only ones able to produce at current prices; and the rest of the OPEC members are none too happy with this agreement. And as always, cartel agreements always fall apart, either by cheating, or, in this case, the majority of its members getting the shaft and not putting up with it any more.

    And if our own government would get out of the way, we could also produce shale oil at much cheaper production costs.